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Accounting Best Practices, Fifth Edition by Steven M. Bragg Englewood, Colorado

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16–21. Segregate Customer-Owned Inventory

A dangerous problem for many controllers is incorrectly valuing inventory too high because customer-owned inventory is mixed into it. This problem is especially common where customers frequently ship components to a company for inclusion in finished products. This situation arises when a customer has the rights to a proprietary product component, prefers to do some finishing work on selected components, or only wants a company to do final assembly work on its products. When any of these situations arise, the receiving staff commonly makes the mistake of recording receipts as company-owned stock and storing it alongside all other inventory in the warehouse. As a result, the inventory can be massively over-valued, leading to incorrectly reported profits.

A solution is to institute procedures and set up segregated areas that allow one to promptly identify customer-owned products at the receiving dock and shunt them immediately to the segregated area. By doing so, one can be assured of having much more accurate inventory quantities and costs. To implement this best practice, it is critical to require a purchase order on all items arriving at the receiving dock. With this procedure in place, the receiving staff can identify all receipts that the purchasing department has previously noted on a purchase order as being owned by a customer. With this information in hand, the receiving staff records the entry in the computer system and then moves ...

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